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Volume Based Technical Analysis
Why Volume Analysis?
Volume Indicators Quotes
When you look at a chart for a major market index such as the S&P 500, you see only a history of the price paid for a basket of stocks. What you
don't see is the total volume for the entire S&P 500 minute-by-minute or
even day-by-day. What you don't see can hurt you.
Why is volume a trader's best friend?
Below are a few reasons why volume-based technical analysis is considered to
be one of the most important aspects of trading and why professional and
institutional traders always pay attention to volume in their analyses.
- Volume offers a complete picture of the market.
You must remember that there is no price movement without volume. If the
volume is equal to zero (no trades occurred) a security's price remain
unchanged at the close price of the previous transaction (when volume was
not equal to zero). The price movement is always accompanied by volume and
single price analysis delivers only half of the picture. Only an analysis of
volume and price together can provide a complete and accurate picture of a
trend.
- Volume can help to determine the health of an existing
trend. Price analysis helps to determine the current trend.
However, by itself, it does not help you to determine how strong the trend
is. When it comes to evaluating the health of a trend, only volume and
advance/decline (breadth) indicators can help you to spot periods when the
trend is strong or weak and might change its direction.
- Specialty volume of indexes and volume-based technical analysis are very good indicators for predicting index shifts.
Volume of the indexes and exchanges is considered to be one of the best
sources for analysis and predicting trend reversals. Averaged by the sum of
volumes of all listed stocks, an index volume is less volatile than the
volume of a single stock. Furthermore, it is more accurate in analysis and
prediction.
- Volume is an indication of supply and demand. The
technical analysis of volume is a basic, yet very important, element of
market timing strategy. Volume is defined as the number of units traded
during a specified time period. If a price trend tells you what is stronger
in the market (supply or demand) at the present moment, only volume can tell
you how strong the supply or demand is (how strong panic selling or greedy
buying is). Only volume can signal a weakening in supply or demand and
possible changes in the supply/demand balance and market sentiment, thus
revealing possible trend turnovers.
- Volume-based technical analysis shows the reversal points
of the market, and therefore when to buy and sell! Currently, when
a change in sentiment and trend occurs in the market, most traders
(investors) don't learn about it until it is too late. This usually happens
due to the lag in the majority of technical indicators. Lagging indicators
follow the trend and when a lag gets to be big for conservative trading it
could be costly to an investor. In contrast, leading indicators, including
indicators that are based on volume, predict possible changes in the trend.
Trading volume, as one of the few leading technical indicators, offers
investors an invaluable tool to know when and where a change in market
sentiment will occur and act accordingly.
- Volume tracks the actions of Big Institutional Traders.
One of the most important aspects of volume analysis is the analysis of
volume surges. Volume during a price decline helps you to see where a stock
is being repeatedly bought as it dips in large amounts (large number of
transactions) by institutional traders. Similarly, towards the end of a
rally, a wide volume surge often signals that the institutional traders are
dumping their stocks because the move is at an end. If you weren't aware of
it before, you should be starting to see why volume is a trader's best
friend.
Additionally, unlike many indicators, volume is applicable to every
timeframe. How can this be? Simple. Volume is a measure of mood/sentiment.
Fortunately for us, human nature is the one ever-present constant of the stock
market. Never forget that. Once you have your own emotions under control as a
trader, the knowledge of this profound fact will guide you ever after as
reliably as the North Star guides a lone sailor across the vast ocean.
For the first time anywhere, MarketVolume® offers a complete picture of the
market. Not only do we supply you with up-to-the-minute index prices of a
variety of major market indicators, we also show you the minute-by-minute
trading volumes. It is this volume that shows the reversal points of the market
and, therefore, when to buy and sell!
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